IMF: Vulnerabilities lie in large external public sector debt and low  international reserve buffers

IMF: Vulnerabilities lie in large external public sector debt and low international reserve buffers

  • By Dulguun   -   Nov 01,2021
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We interviewed the International Monetary Fund (IMF)’s mission chief for Mongolia, Angana Banerji, to take a closer look at the Mongolian economy and IMF’s latest “Regional Economic Outlook for Asia and Pacific” report.

How is the Mongolian economy faring amid the COVID-19 pandemic compared to other Asian countries? What factors led IMF to moderately downgrade its projection for Mongolia?

Asian emerging market economies are expected to clock 7.2 and 6.3 percent growth in 2021 and 2022 respectively. Asia’s outlook for 2021 and 2022 has been downgraded relative to the IMF’s July 2021 forecasts because of new peaks of the pandemic cycle.

In contrast, Mongolia’s economic outlook is strong, largely due to an export boom. Mongolia’s GDP growth is forecast to reach 4.5 and 7 percent in 2021 and 2022 respectively. While this is a modest downward revision relative to the forecasts published in the IMF’s “World Economic Outlook” of October 2021 – caused primarily due to the persistence of border closures and the resulting export disruptions – Mongolia’s overall outlook remains strong.

An export-led recovery started since mid-2020 despite border closures and is expected to gather speed once copper exports from the Oyu Tolgoi mines come onstream. The global economic recovery, continued policy support and base effects are also expected to support Mongolia’s GDP growth.

Domestic activity on the other hand – especially private consumption and non-mining investment – remains weaker than expected, despite a successful vaccination program and large policy support to the economy.


Which areas should Mongolia focus on for a healthy economic recovery? Are there any concerns that could potentially put the Mongolian economy at high risk?

Although Mongolia’s outlook is strong, the domestic economic recovery remains weak due to the lingering pandemic. Therefore, some near-term policy support may still be needed until the domestic recovery is entrenched. Any additional fiscal support should be targeted toward those in need and to boost health systems, allowing the untargeted and excessive support in the Anti-Pandemic Law to expire at the end-2021. Monetary policy can stay on hold for now since the recent uptick in inflation is expected to subside.

To facilitate a post-pandemic recovery, reforms that improve public and private sector balance sheets are critical. Improving Mongolia’s weak external position will require sustainable fiscal policies, a strong financial sector, and good governance.

  • - Mongolia should use the export boom to strengthen its fiscal position on the basis of high-quality reforms and ensure external debt sustainability. Notably, a well-targeted social safety net should be put in place which adequately supports the poor. Reforms in overly generous pension parameters to reduce rising budget subsidies, and in public investment management systems to improve value-for-money and efficiency, are also required. Preserving the integrity of the Future Heritage Fund will be crucial for investor confidence. There is also scope to increase revenues through greater progressivity in the personal income tax, and continued improvements in tax administration.
  • - The central bank should address capital deficient banks and undertake a well-thought-out and sequenced approach to bank restructuring, which minimizes the risks of financial instability. The 2023 IPO deadline should be delayed to allow regulators time to put necessary pre-conditions and contingency plans in place and for banks to strengthen their balance sheets after forbearance measures have been fully lifted.
  • - Revamping the insolvency framework, addressing corruption and judiciary reforms are important to improve impaired corporate and financial sector balance sheets and should be prioritized. Parliament should resist making decisions on monetary and financial operations to enhance the central bank’s operational independence and its ability to control inflation. Quasi-fiscal operations should be transferred to the budget and phased out.

Mongolia’s strong economic outlook faces large downside risks. Mongolia is highly vulnerable to external developments given its large external public sector debt and low international reserve buffers. Therefore, a global resurgence of the pandemic, extended border closures with China, and/or tighter global financial conditions could hurt Mongolia’s economic and fiscal outlook, especially if such developments also triggered drop in commodity prices. Domestic policies are also a major source of vulnerability. Procyclical spending policies – such as a permanent expansion of untargeted social assistance – can undermine debt sustainability. Banking sector instability arising from a sharp rise in bad loans in undercapitalized banks could delay the recovery.

China closed its border with Mongolia earlier this month once again. Its impacts haven’t shown but it may worsen the import congestion, which had been improving after the sides made certain arrangements. Can you share your professional perspective on this matter?

Border closures with China have heavily disrupted Mongolia’s exports and imports, thereby affecting its external balances, fiscal revenues, inflation, and international reserves. We hope these disruptions will be resolved soon.

Two trade terminals are being built at the border to facilitate zero-contact trade at the border whilst ensuring sanitary requirements. It is our understanding that these terminals will be fully operational before the end of the year and should help improve the situation. Of course, controlling the pandemic would be critical to avoid future border closure.

Mongolia is pushing forward for green growth, particularly renewable energy. Will IMF cooperate with the local government on this matter? Which other areas do you plan to focus on in the future?

Greater uncertainty in weather trends, higher average temperatures and extreme climate events can lead to high socio-economic costs and lower growth in Mongolia. They could accelerate land degradation and hurt the livestock sector.

It would therefore be necessary to make the agricultural sector more productive and resilient to extreme climate shocks and warmer temperatures and balance the livestock population with nature’s capacity to regrow. Better pasture management can also improve livestock productivity. The government should also facilitate Mongolia’s adaptation to warmer temperatures and make the economy more resilient to climate shocks.

More generally, we welcome the government’s emphasis on sustainable green growth in Vision-2050. Achieving these long-term goals will require sustainable fiscal policies and strengthened public investment management systems to create sufficient room in the budget to help facilitate the transition to green growth. A greater private sector role will also be necessary to partner with the government to achieve its green growth goals. This, in turn, will require a stronger financial sector and improved governance. We will continue collaborating with the authorities on all these issues.

Dulguun Bayarsaikhan

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